India’s Goods and Services Tax (GST) framework underwent a key revision in 2025. The 56th GST Council meeting introduced a new three-tier tax structure. This includes a merit rate of 5 per cent for essentials, a standard rate of 18 per cent for most goods, and a special demerit rate of 40 per cent for select sin goods. Tobacco products were expected to move to the highest 40 per cent slab. However, the Council’s decisions on tobacco taxation have sparked debate, especially regarding bidis and related products.
Revised GST Rate Structure
The GST Council established three main rates – 5 per cent for essential goods, 18 per cent as the normal rate for general items, and 40 per cent as a special demerit rate targeting sin goods. Sin goods include sugary products, aerated drinks, and carbonated fruit beverages. Tobacco products like cigarettes and pan-masala were placed under the 40 per cent slab. However, bidis and their raw materials, such as tendu leaves and katha, were assigned a much lower 5 per cent rate, down from 18 per cent.
Taxation on Bidis and Tobacco Products
Bidis, often called the poor man’s luxury, remain a major health risk. Reducing their GST rate from 28 per cent to 18 per cent or even 5 per cent may encourage consumption among vulnerable groups. This lower tax rate equates bidis with everyday items like televisions or dishwashers, undermining their harmful nature. Other tobacco products, including cigarettes, gutkha, and chewing tobacco, are taxed based on retail sale price (RSP) valuation to curb tax evasion.
Retail Sale Price Valuation and Abatement
Under the RSP-based GST model, tax is collected upfront at the manufacturing stage using the retail price. An abatement factor reduces this price to approximate the manufacturer’s ex-factory cost for tax calculation. The remaining value added during distribution is taxed separately. Currently, Central Excise Duty and National Calamity Contingent Duty apply a 55 per cent abatement on tobacco products. This means a 40 per cent GST on the abated value results in an effective tax rate closer to 18 per cent.
Health and Fiscal Implications
Reducing or removing abatement would increase the tax base and strengthen the deterrent effect on tobacco consumption. The government’s goal to achieve Universal Health Coverage through Ayushman Bharat faces challenges from tobacco-related diseases. Lower taxes on bidis may increase health burdens on poor populations and strain public health insurance schemes. The Compensation Cess on tobacco products, which adds to tax rates, will end by March 2026. The government is considering introducing a health cess to maintain high tax pressure on tobacco.
Implementation Timeline and Future Outlook
Revised GST rates for most goods take effect from 22 September 2025. Tobacco products retain existing rates until Compensation Cess liabilities are cleared. Post-March 2026, new abatement rates and possible health cesses will shape tobacco taxation. The government faces the challenge of balancing tax simplification with public health priorities, especially for vulnerable groups consuming bidis.
Questions for UPSC:
- Taking example of India’s GST reforms, discuss the challenges of tax policy in balancing revenue generation and public health objectives.
- Examine the role of indirect taxes such as GST and excise duties in controlling consumption of harmful products like tobacco and sugary drinks.
- Analyse the impact of health insurance schemes like Ayushman Bharat on managing the economic burden of lifestyle diseases in India.
- Discuss in the light of India’s tobacco taxation policy, how fiscal measures can influence consumption patterns among vulnerable populations and contribute to sustainable development goals.
